Investment Highlights

• We maintain HOLD on WCT Holdings (WCT) with an unchanged fair value (FV) of RM0.42/share based on a FY23F PE of 9x, in line with our benchmark for small-cap construction stock. There is no FV adjustments for ESG based on our 3-star rating.

• WCT’s FY22 performance was disappointing, posting a core net loss of RM20mil compared to our net profit forecast of RM9mil and consensus’ RM46mil. Nevertheless, we keep our earnings estimates for FY23F pending clarification from an analyst briefing today.

• YoY, WCT’s CNL narrowed 77% YoY to RM20mil in FY22. One-offs in FY22 included fair value gain on investment properties (RM62mil), gains from the sale of Sungai Buaya land (RM56mil) and reversal of tax provision on a gain from the settlement of arbitration award in relation to the WCT-Meydan suit in the Middle East (RM63mil), coupled with pandemic and inflationary impact on construction projects (RM48mil).

• Excluding the one-off items, construction EBIT fell 40% to RM90mil in FY22 from RM150mil in FY21 due to weaker margins.

• WCT’s property development revenue (ex-land disposals) grew 30% to RM238mil in FY22 from RM182mil in FY21. However, the division’s loss widened to RM32mil in FY22 from RM14mil in FY21 as most properties were sold at lower prices.

• After adjusting for rebates granted to tenants and net fair value adjustments of a hotel held by JV, property investment EBIT grew 61% YoY to RM154mil in FY22 from RM95mil in FY21, attributed to increased post-pandemic footfalls at shopping malls.

• We are positive on the recovery of footfalls and occupancy in the group’s shopping malls. However, as no announcements were made during the quarter, we believe that WCT has not secured substantial jobs this year. This clouds the company’s earnings visibility. We estimate the group’s order book to be RM3.5bil as at 31 Dec 2022, an 8% QoQ decline.

• Going forward, WCT’s challenges include (i) weaker-than-expected recovery of job flows; (ii) eroding profit margins from higher-than-expected building material costs and labour shortages; and (iii) shelving of mega projects.

• WCT is currently trading at a slightly higher FY23F PE of 9.8x compared to 9x for our benchmark for small-cap construction stocks.

Source: AmInvest Research - 28 Feb 2023